Companies Act, 2019 – Directors under the Spotlight
The high spate of recent bank failures and the historic low shelf life of Ghanaian businesses has thrown into sharp focus the role of individuals and agents in these failures. The need to hold these individuals accountable and cause them to act more responsibly and in the best interest of the company is one of the themes in the new Companies’ Act, 2019 (Act 992).
So my question to you is: Do you manage a company or an SME? Are you a director? Have you ever been a director of a company that has gone insolvent? If you answer yes to any of these, then I’ve got news for you.
First, Section 170(1) of Act 992 defines directors as persons who have been appointed to direct and administer the business of the Company. In spite of the requirement in Section 170 (1) that a director must be “appointed”, Act 992 extends the director tag to also include a person who holds himself out as being a director of a company. To that extent, the “un-appointed director” is also subject to the same duties and liabilities as if that person was appointed as a director of the company. At this point, it is worth mentioning that there is a growing practice of companies giving out “directorship roles” to persons who are not necessarily directors and do not sit on the board of directors. Example of such fancy designations includes “director of transport”; “director of external relations” and “director of investments”. Companies must understand that these designations may come with consequences and implications for the company and for the individuals to whom these honours are extended.
Secondly, every company is expected to have at least two (2) directors. All the directors must not necessarily be resident in Ghana. The law simply requires that one (1) of the directors must be ordinarily resident in Ghana. It is, therefore, an offence for a company to carry on business with less than two (2) directors, for more than four (4) weeks. If this happens, the company, the director and each member of the company will be fined an administrative penalty of twenty-five (25) penalty units (GHS 300) for each day during which the company carries on business without having at least two (2) directors. Further, each director and every member of the company who is aware that the company is carrying on business with less than two (2) directors would be jointly and severally liable for any debts or liabilities of the company incurred during that period.
What does it take to become a director?
Having dealt with who a director is and the number of directors a company must have (and the consequences of not complying with the minimum number of directors’ requirement), the next question is – what does it take to become a director? And the answer is simple – a whole lot.
Before a person is appointed as a director, that person must go through some pre-appointment formalities. First, the person has to make a statutory declaration (what many people erroneously refer to as an affidavit). In the statutory declaration, the person to be appointed must make a number of declarations. These declarations include a statement to the effect that he or she during the last five (5) years before the incorporation of the company, has not:
- been charged or convicted of an offence involving dishonesty or fraud;
- charged or convicted of a criminal offence relating to the promotion, incorporation of management of a company; or
- been a director or a manager of a company that has become insolvent or if the person has been, the date of the insolvency and the particular company.
A copy of the statutory declaration must be first placed with the company and subsequently with the Registrar of Companies
Second, the person should, before the appointment, have consented to act as a director and filed the consent within twenty-eight (28) days of the appointment. It is worth mentioning that directors are not required to be members or shareholders of the companies on whose boards they act.
What do directors do?
The director of a company stands in a fiduciary relationship with the company. This means that the director holds a position of trust and confidence and as a result, the director is under an obligation to act solely in the company’s interest. By extension, the director must (a) act in utmost good faith in relation to the company at all times and (b) always act in what he believes to be the best interest of the company. In more specific terms, the director is required to act in order to preserve the company’s assets, further the business, and promote the purposes for which the company was formed in a manner that a faithful, diligent, careful, and ordinary skilled director would act in the circumstances. Also, a director is prohibited from taking the assets of the company for their personal use or benefit.
Directors are also required to avoid all conflict of interest situation; and where that is not possible, the directors must disclose all such interests in the company that is likely to create a conflict of interest between the directors’ role and the company.
Who cannot be a director?
Act 992 (like its predecessor the Companies Act, 1963 (Act 179) has a relatively long list of disqualification criteria. For instance, a person cannot hold office as a director of a company, if:
- the person is convicted of an offence involving fraud or dishonesty;
- the person is convicted of an offence in connection with the promotion, formation or management of a body corporate
- it appears that the person may have been guilty of a criminal offence whether they were convicted of one or not;
- the person commits or is convicted of an offence related to insider dealing or any other offence which is not a misdemeanour;
- a person is adjudged bankrupt;
- the person has been disbarred from being part of a recognized professional body as a result of disciplinary action; or
- there is an ongoing criminal investigation in which the person is involved.
Note that with the criteria under (3), one does not need to be convicted of a criminal offence. It appears that the mere implication or appearance of a person committing an offence (irrespective of the outcome of a criminal trial) is enough to disqualify a person as a director.
Further, an individual is also automatically disqualified from acting as a director where the individual;
- has been convicted within the last five (5) years of an offence involving dishonesty, fraud or relating to the promotion, formation and running of a company;
- has been the director or a senior executive of a company that became insolvent within the past five (5) years on account of or partly as a result of the culpable activities of that director; or
- has been disqualified to act as Company Secretary, receiver, manager or liquidator of a company.
In the case of a person convicted for an offence involving dishonesty or fraud in relation to the incorporation, formation or running of a company, when such a person is convicted for a second time, the person is automatically disqualified from acting as a director or senior manager for a period of ten (10) years. A third conviction results in a permanent disqualification.
It is important to note that a person previously disqualified from acting as a director may seek leave of court to act in the role as a director (S 177(9)) before the expiration of the disqualification period.
Interestingly, a person who is disqualified from acting as a director is mandated to disclose his disqualification to the Board and the Company Secretary in writing or may be liable on summary conviction to a fine between 500 penalty units (GHS 6000) and 1000 penalty units (GHS 12,000) or a term of imprisonment of not less than two (2) years.
A common issue which comes up in corporate governance is what do to about situations where directors and senior management of companies partake in contracts which involve the companies whom they serve. Well, Act 992 mandates directors to declare the nature and extent of all interests they may have in contracts involving the company at a meeting of directors and to be neither present or vote in a matter in which the director is interested. This requirement to disclose the interests of a director in contracts involving the company would go a long way to reduce losses made by companies in respect of contracts entered into with directors and other related parties.
Act 992 further requires companies to maintain an “Interests Register” which is required to contain all directors’ interests in the company and in contracts involving the company. The Interests Register is to be available for inspection at least two (2) hours each day and also during company meetings. Failure of a director to declare and register their interests in the affairs of a company would amount to a criminal offence punishable upon summary conviction to a fine between 250 penalty units (GHS 3000) and 500 hundred penalty units (GHS 6000).
From the above discussion, we can safely draw the following conclusions: (a) directors play a critical role in the success of a business; (b) Act 992 recognizes this significant role played by directors; (c) in view of the crucial role that directors play, Ghana law recognizes the need to hold them to a high level degree of accountability; (d) only men and women of high integrity can bear the tag of directors; and (e) Act 922 aims at shining the torch on every conduct of the director in order to ensure that transparency is the order of the day.